Hirschler is pleased to provide highlights from the 2019 American Bar Association Private Target Deal Points Study. Released exclusively to the members of the ABA M&A Committee on December 2, the latest study sheds new light on the impact representations and warranties (R&W) insurance is having on deal points in M&A transactions involving privately-held targets.
The latest biannual Deal Points Study offers a robust, 15-month analysis of acquisitions of privately-held targets by publicly-held buyers. The study draws data from 151 middle market transactions executed or closed in 2018 or the first quarter of 2019. Transactions included in the study ranged from $17 million to $500 million and the average transaction value was $207.8 million.
- More deals are using R&W insurance: 52% of deals in the 2019 study as compared to 29% in the 2017 study.
- 95% of all deals contained a post-closing adjustment, which is up from 86% of deals under the 2017 study. 87% (up from 73% in 2017) of these adjustments were based on more than one metric.
- The most common survival periods for non-fundamental representations and warranties remained 18 months (38%) or 12 months (35%). However, there was a meaningful jump in the number of deals with no survival (14%, up from 7% in the 2017 study).
- 63% of deals contained an indemnification basket of 0.5% or less – just over half of those baskets were included in deals with R&W insurance. In the 2017 study only 45% of deals contained a basket of 0.5% or less and just over 1/3 of those deals included R&W insurance.
- Caps on a seller’s indemnification obligations continue to fall – the average across all deals is 8.99% of total transaction value – 12% for deals without R&W insurance and 5.82% for deals with R&W insurance. There was a significant increase in the number of deals with a 1% or less cap, which is directly tied to R&W insurance – 30% of all deals had a 1% or less cap, almost all of which were deals with R&W insurance.
- Average indemnification escrows and holdbacks continued to fall (now at 5.57% of total transaction value down from 6.66% in the 2017 study), but this is attributable to R&W insurance. For deals without R&W insurance, escrows and holdbacks rose from 8.6% to 9.4% of transaction value as compared to the 2017 study.
- In fewer deals, the escrow and R&W insurance are the sole sources of recovery for fundamental reps (14% of deals, down from 23% in the 2017 study).
New Deal Terms
- Despite court guidance to make the definition of “material adverse effect” (MAE) more specific as to dollar amounts and/or duration, only a handful of deals contain such specificity in their definitions. The study has continually found that very few deals report a dollar amount listed in the MAE definition. This year, the study also confirms that only 3% of deals contained reference to specific durational requirements for finding an MAE.
- 13% of deals included a #metoo representation that specifically referred to claims of sexual harassment, 50% of which were qualified by knowledge.
- 68% of deals included a specific representation regarding compliance with privacy laws and 70% of deals included a representation regarding the target’s information technology systems and unauthorized access or use.
To learn more about the findings of the 2019 study, contact a member of the Hirschler M&A practice group.
Luis F. Ruiz